Definition
Diversification
Diversification is spreading investments across different assets, sectors and geographies so that poor performance in one does not sink your whole portfolio.
By holding assets that do not all move together — equities, debt, gold, and ideally some global exposure — you reduce the risk of any single holding or market hurting you badly, without necessarily sacrificing long-term return. It is often called the only 'free lunch' in investing because it lowers risk for a given expected return.
Diversification directly counters home bias and over-concentration in, say, an employer's stock or one city's property. The aim is not to own everything, but to ensure no single failure is catastrophic — a portfolio built to survive being wrong about any one bet.
Related terms
- Asset AllocationAsset allocation is the decision of how to divide your portfolio among major asset classes — such as equity, debt, gold and cash — based on your goals, horizon and risk tolerance.
- Home BiasHome bias is the tendency of investors to overweight assets from their own country, sector or even employer, neglecting the diversification benefits of going wider.
- DiversificationDiversification is spreading investments across different assets, sectors and geographies so that poor performance in one does not sink your whole portfolio.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.